/>iAs discussed in our prior blog entitled “New York’s Sovereign Debt Restructuring Proposals,”[1] three bills were introduced in the New York state legislature to overhaul the way sovereign debt restructurings are handled in New York. Those bills sought to implement a comprehensive mechanism for restructuring sovereign debt, limit recovery on certain sovereign debt claims, and amend the champerty defense. None of the bills advanced to a full vote during the 2023 legislative session and, therefore, failed.
Earlier this month, however, New York lawmakers led by Senator Gustavo Rivera introduced the Sovereign Debt Stability Act (the “Bill”).[2] The legislators seek, pursuant to the Bill, to reform New York law governing sovereign debt by merging two previous bills. Specifically, the Bill seeks to merge the proposal to implement a comprehensive mechanism for restructuring sovereign debt and the proposal to limit recovery on certain sovereign debt claims. As a reminder, those proposals would: (i) impose a voting mechanism on sovereign debt restructurings governed by New York law, which include submission of a restructuring plan to all creditors for a vote and approval by at least two-thirds of the claims by amount and over half by number (a vote similar to that required for approval of a plan under the U.S. Bankruptcy Code); (ii) provide for the appointment of an “independent monitor” to facilitate and encourage a prompt and fair agreement; and (iii) limit recovery on claims against sovereigns participating in certain international debt relief initiatives.
Supporters believe that the Bill in its current form has the greatest chance of passing into law.[3] The Bill, however, still suffers from the same constitutional issues that we discussed in our prior post, namely, that the proposed comprehensive mechanism New York seeks to impose may already be preempted by the U.S. Bankruptcy Code and the Bill’s retroactive application may violate the Contracts Clause in the U.S. Constitution. Indeed, any state law designed to establish a framework for restructuring sovereign debt likely would run afoul of the U.S. Bankruptcy Code and be preempted. Further, such a law could, once again, be viewed as an improper restriction on the ability of parties to freely contract without a legitimate public purpose.
Additionally, critics are concerned that hasty legislative changes without multilateral consultation will have further unintended consequences. On March 13, 2024, a group of interested organizations penned a letter strongly opposing the Bill, arguing that the Bill attempts to solve problems that have largely been dealt with by collective action clauses.[4] The opposition cites the fact that the average duration of a sovereign debt restructuring has been cut from 3.5 years to 1.2 years since the introduction of collective action clauses. They argue that the Bill will result in increased financing costs due to legal uncertainties associated with a new and lightly-defined legal process for dealing with sovereign debt. This will hurt the countries that the Bill seeks to help by adding a substantial risk premium to their cost of borrowing.
Another criticism is that the legislation will dent New York’s hard-earned history and reputation as a leading financial center known for its transparent and neutral enforcement of financial contracts and trusts.[5] Parties opposing the Bill argue that it will likely encourage forum shopping as investors, faced with increased risk and uncertainty, look to other jurisdictions to issue debt. In fact, this already occurred late last year when the indenture for the exchanged bond in Suriname’s restructuring was modified to include language that lowered the voting threshold from a supermajority to a simple majority of holders to change the governing law of the bonds from New York to another jurisdiction.[6] This modification was the direct result of concern over the three sovereign debt restructuring bills proposed by New York last year.
The Bill has recently been referred to the New York Senate’s Banks Committee. It remains to be seen whether New York lawmakers will finally be successful in enacting this legislation. Senator Rivera is certainly set on it, stating that it will be one of his top priorities for the rest of the year.[7]
While the Senator may be intent on seeing to the passage of the Bill, it is far from certain that even if passed, the Bill will become an enforceable law anytime soon given the likely constitutional challenges that await. But, given New York’s prominent role in sovereign debt, the issues raised by the Bill and the attempts by New York to further regulate and control the restructuring process will continue to be issues that must be addressed by sovereigns and debt holders alike.
[1] Restructuring GlobalView, Jul. 12, 2013 <https://www.restructuring-globalview.com/2023/07/new-yorks-sovereign-debt-restructuring-proposals/>.
[2] Assembly Bill A2970A dated Feb. 1, 2023 <https://www.nysenate.gov/legislation/bills/2023/A2970/amendment/A>.
[3] Kate Duguid and Joseph Cotterill, “New York moves to rewrite law on sovereign debt default recovery”, Financial Times, Mar. 6, 2024 <https://www.ft.com/content/3c4f3323-d9bb-4399-94fb-0bd4abd67b2a>.
[4] Those organizations are the American Council of Life Insurers, The Credit Roundtable, the Investment Company Institute, the International Capital Market Association, the Institute of International Finance, the Life Insurance Council of New York, the Partnership for New York City, and the Securities Industry and Financial Markets Association. See ACLI, CRT, ICI, ICMA, IIF, LICONY, PFNYC, and SIFMA Oppose New York Legislature Bill on Sovereign Debt, Mar. 13, 2024 <https://www.iif.com/About-Us/Press/View/ID/5701/ACLI-CRT-ICI-ICMA-IIF-LICONY-PFNYC-and-SIFMA-Oppose-New-York-Legislature-Bill-on-Sovereign-Debt> (the “IIF Opposition Letter”).
[5] IIF Opposition Letter, page 3.
[6] Simon Schatzberg, “Restructured Suriname Bond Indenture Seeks to Preempt Proposed New York Sovereign Debt Legislation”, Reorg, Nov. 22, 2023 <https://app.reorg.com/file/987934/Suriname_-_2023-11-22_11_40_05_-_Restructured_Suriname_Bond_Indenture_Seeks_to_Preempt_Proposed_New_York_Sovereign_Debt_Legislation-66523-0.pdf>.
[7] Zijia Song, “Wall Street Slams NY Lawmakers Over Sovereign Debt Bill”, Bloomberg Law, Mar. 13, 2024 <https://www.bloomberg.com/news/articles/2024-03-13/wall-street-pushes-back-on-new-york-s-latest-sovereign-debt-bill>.
